Elon Musk and his products are genius. No one denies that. What investors have cast shadows on is the ability of Tesla Motors Inc (TSLA) to crack the mainstream domestic car market. Last week’s reveal of the Model 3 brought a massive response from consumers, as more than 276,000 have plunked down $1,000 deposits to purchase a car that won’t be available until 2017.
For comparison sake, the Model 3 would be right behind the Honda (HMC) Civic by 2015 sales standards. Clearly, this car has the ability to change the game for Tesla and TSLA stock. The question now is whether Tesla is still a buy.
At today’s prices, the answer is almost an immediate “no,” as the stock has punched through the $240 level and caused Tesla bears to scramble to close losing positions.
Click to Enlarge The adjacent chart displays the buildup of short interest that has occurred over the last six months as the bearish camp grew. As with all short squeezes, this rally will cool and TSLA will likely pull back to a more reasonable level.
The technical charts suggest that the time for this cooldown may be sooner rather than later. Currently, Tesla stock’s short-term RSI reading (a technical indicator that gauges overbought/oversold situations) has broken above 70, indicating that TSLA shares have come too far, too fast.
The last time this indicator signaled similarly was in June 2015, as Tesla stock hit a high around $280 before plunging to $220.
A difference maker for TSLA may be its current Wall Street analyst recommendations. As of today, 38% of those covering the stock have it ranked a buy, with 33% and 29% rating it a hold or sell, respectively.
What This Means for Tesla Stock (TSLA)
This creates two potentially bullish catalysts for Tesla. First, the fact that TSLA is not crowded with buyers is a positive. Second, the fact that 62% of the analysts are now in a position where they may fall behind on their recommendations. This means that we are likely to see some upgrades on Tesla stock, especially from the 29% that are sellers of the shares.
There’s about a month between now and Tesla Motor’s next earnings report, which means that we are soon to see traders jockeying for positions ahead of what is likely to be one of the more positive earnings and outlooks for the company in some time.
We still expect to see delays on its other models, though, as the company struggles to keep up with production demands, but the clear popularity of this mid-market design appears to be just what Tesla needs to shake this multi-year wide trading range.
For now, we would set our target on the $240 price as a good entry after the current frenzy dies off. Otherwise, it appears that Tesla stock is finally finding the traction it needs to start breaking to new all-time highs.
As of this writing, Johnson Research did not hold a position in any of the aforementioned securities.
